UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-17686
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Wisconsin | 39-1606834 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
1100 Main Street, Suite 1830 Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting securities held by non-affiliates of the Registrant: The aggregate market value of limited partnership interests held by non-affiliates is not determinable since there is no public trading market for the limited partnership interests.
TABLE OF CONTENTS
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
| 2 |
Background
The Registrant, DiVall Insured Income Properties 2 Limited Partnership (the “Partnership”), is a limited partnership organized under the Wisconsin Uniform Limited Partnership Act pursuant to a Certificate of Limited Partnership dated as of November 20, 1987, and governed by a Limited Partnership Agreement, as amended from time to time (collectively, the “Partnership Agreement”). The Partnership is managed by its general partner, The Provo Group, Inc. (“TPG” or the “General Partner”). As of December 31, 2018, the Partnership had 1,217 limited partners owning an aggregate of 46,280.3 Limited Partnership Interests (the “Interests”).
The Partnership is engaged in the business of owning and operating its investment portfolio of commercial real estate properties (each a “Property” and collectively, the “Properties”). At December 31, 2018, the Partnership owned 10 Properties, located in a total of three states.
At December 31, 2018, eight of the 10 Properties were (and continue to be) leased to three Wendy’s franchisees, with five of the Properties being leased to Wendgusta, LLC (“Wendgusta”), two of the Properties being leased to Wendcharles I, LLC (“Wendcharles I”), and one of the Properties being leased to Wendcharles II, LLC (“Wendcharles II”). Operating base rents from these eight leases during the year ended December 31, 2018 comprised approximately 80% of the total 2018 operating base rents. During the year ended December 31, 2018, additional percentage rents were also generated from these eight Wendy’s properties and totaled $528,372. Additionally, those eight Properties exceeded 80% of the Partnership’s total Properties, both by historical asset value and number. All eight of the Properties that are currently leased to Wendy’s franchisees now feature a lease expiration date of November 6, 2026.
See Properties under Item 2 below for the table of all Properties and lease expirations and a discussion of Properties with significant developments during the year ended December 31, 2018.
During the process of leasing the Properties, the Partnership may experience competition from owners and managers of other properties. As a result, in connection with negotiating tenant leases, along with recognizing market conditions, the General Partner may offer rental concessions, or other inducements, which may have an adverse impact on the results of the Partnership’s operations. The Partnership is also in competition with sellers of similar properties who from time to time attempt to locate suitable purchasers for its Properties.
The Partnership Agreement specifies that the Partnership is scheduled to be dissolved on November 30, 2020, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all its Properties; (b) the written determination by the General Partner, that the Partnership’s assets may constitute “plan assets” for purposes of ERISA; (c) the agreement of limited partners owning a majority of the outstanding Interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority of the limited partners.
On May 18, 2018, the Partnership concluded a special consent solicitation process in which it solicited affirmative consents from the limited partners to authorize the General Partner to sell all or substantially all of the Partnership’s properties, and to subsequently liquidate and dissolve the Partnership upon completion of the sale (collectively, the “Transaction”). The Transaction was approved by written consent of the holders of a majority of the outstanding limited partnership interests. On July 24, 2018, the Partnership mailed to interested parties a confidentiality agreement and a letter that included procedures, terms and conditions (the “Procedures”) for a sealed bid sale for the potential sale of the Properties. Under the Procedures communicated to all prospective bidders, the deadline for submitting bids complying with the Procedures was September 28, 2018 (the “Bid Deadline”). On October 2, 2018, the General Partner determined that no bid response received by the Bid Deadline satisfied the terms and conditions of the Procedures. Accordingly, the General Partner determined it was in the best interests of the Partnership to suspend its efforts with respect to consummating the Transaction, and the sealed bid process was terminated due to failure to receive a compliant bid.
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The Permanent Manager Agreement
The Permanent Manager Agreement (“PMA”) was entered into on February 8, 1993, between the Partnership, DiVall 1 (which was dissolved in December 1998), DiVall 3 (which was dissolved in December 2003), the now former general partners, Gary J. DiVall and Paul E. Magnuson, their controlled affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains provisions allowing TPG to submit to the PMA, election of TPG as General Partner, and the issue of acceptance of the resignations of the former general partners to a vote of the limited partners through a solicitation of written consents.
TPG, as the General Partner, has been operating and managing the affairs of the Partnership in accordance with the provisions of the PMA and the Partnership Agreement since February 8, 1993.
Effective January 1, 2019, the PMA was renewed by the General Partner for a two-year period ending December 31, 2020. The PMA can be terminated earlier (a) by a vote at any time by a majority interest of the limited partners, (b) upon the dissolution and winding up of the Partnership, (c) upon the entry of an order of a court finding that TPG has engaged in fraud or other like misconduct or has shown itself to be incompetent in carrying out its duties under the Partnership Agreement, or (d) upon 60 days’ written notice from TPG to the limited partners of the Partnership.
Advisory Board
The concept of the Advisory Board was first introduced by TPG during the solicitation of written consents seeking to elect TPG as the General Partner. The first Advisory Board was established in October 1993. Among other functions, the three-person Advisory Board has the following rights and duties: to review operational policies and practices; to review extraordinary transactions; to review internal financial controls and practices; and to review the performance of the independent auditors of the Partnership. The Advisory Board’s powers are advisory only and the Advisory Board does not have the authority to direct management decisions or policies of the Partnership or remove the General Partner. The Advisory Board has full and free access to the Partnership’s books and records, and individual Advisory Board members have the right to communicate directly with the limited partners concerning Partnership business. Members of the Advisory Board are compensated $1,500 annually and $500 for each quarterly meeting attended.
The Advisory Board currently consists of a broker dealer representative, William Arnold; and limited partners of the Partnership: Jesse Small and Albert Kramer. For a brief description of each Advisory Board member, refer to Item 10, Directors and Executive Officers of the Registrant.
No Employees; Location of Business Operations
The Partnership has no employees.
All of the Partnership’s business is conducted in the United States.
Available Information
The Partnership is required to file with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, along with any related amendments and supplements to these periodic and current reports. The SEC maintains a website containing these reports and other information regarding our electronic filings at www.sec.gov.
We also make these reports and other information available either on or through our Internet Website at www.divallproperties.com as soon as reasonably practicable after such reports are available. Please note that any internet addresses provided in this Annual Report on Form 10-K are for information purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.
As a smaller reporting company, the Partnership is not required to disclose risk factors in its annual report on Form 10-K.
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Item 1B. Unresolved Staff Comments
None.
Nine out of 10 Properties are leased to franchisees of national, regional and local fast food, family style and casual/theme restaurants. The tenth Property is leased to Brakes4Less of Columbia, Inc..
Original lease terms for the leased Properties are generally five to 20 years from their inception. All leases are triple-net, which require the tenant to pay all property operating costs including maintenance, repairs, utilities, property taxes, and insurance. A majority of the leases contain percentage rent provisions, which require the tenant to pay a specified percentage (six percent to seven percent) of gross sales above a threshold amount. None of the Properties are mortgaged. The Partnership owns the buildings and land, and all improvements for all the Properties. The Partnership owned the following Properties as of March 31, 2019:
| Acquisition
Date | Property
Name & Address | Lessee | Purchase
Price (1) | Operating
Rental Per Annum | Lease
Expiration Date | Renewal
Options | ||||||||||
| 12/22/88 | Wendy’s (3) 1721 Sam Rittenberg Blvd Charleston, SC | Wendcharles II, LLC | 596,781 | 76,920 | 11-6-2026 | (2) | ||||||||||
| 12/22/88 | Wendy’s (4) 3013 Peach Orchard Rd Augusta, GA | Wendgusta, LLC | 649,594 | 86,160 | 11-6-2026 | None | ||||||||||
| 02/21/89 | Wendy’s (4) 1901 Whiskey Rd Aiken, SC | Wendgusta, LLC | 776,344 | 96,780 | 11-6-2026 | None | ||||||||||
| 02/21/89 | Wendy’s (4) 1730 Walton Way Augusta, GA | Wendgusta, LLC | 728,813 | 96,780 | 11-6-2026 | None | ||||||||||
| 02/21/89 | Wendy’s (5) 343 Folly Rd Charleston, SC | Wendcharles I, LLC | 528,125 | 70,200 | 11-6-2026 | (2) | ||||||||||
| 02/21/89 | Wendy’s (5) 361 Hwy 17 Bypass Mount Pleasant, SC | Wendcharles I, LLC | 580,938 | 55,333 | 11-6-2026 | (2) | ||||||||||
| 03/14/89 | Wendy’s (4) 1004 Richland Ave Aiken, SC | Wendgusta, LLC | 633,750 | 90,480 | 11-6-2026 | None | ||||||||||
| 12/29/89 | Wendy’s (4) 517 E Martintown Rd N Augusta, SC | Wendgusta, LLC | 660,156 | 87,780 | 11-6-2026 | None | ||||||||||
| 12/29/89 | Brakes 4 Less (6) 3859 Washington Rd Martinez, GA | Brakes4Less of Columbia, Inc. | 633,750 | 0 | (6) | 05-14-2030 | (2) | |||||||||
| 05/31/90 | Applebee’s
2770 Brice Rd Columbus, OH | RMH Franchise Corporation | 1,434,434 | 138,000 | 08-31-2027
| (2) | ||||||||||
| $ | 7,222,685 | $ | 798,433 | |||||||||||||
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Footnotes:
| (1) | Purchase price includes all costs incurred by the Partnership to acquire the Property. |
| (2) | The tenant has the option to extend the lease one additional period of five years. |
| (3) | One of the 10 Properties owned as of December 31, 2018 was leased to Wendcharles II. Since more than 80% of the Properties, both by historical asset value and number are leased to Wendy’s franchisees the financial status of the tenant may be considered relevant to investors. At the request of the Partnership, Wendcharles II provided it with a copy of its reviewed financial statements for the fiscal years ended December 30, 2018 and December 31, 2017. Those reviewed financial statements are attached to this Annual Report on Form 10-K as Exhibit 99.2. |
| (4) | Five of the 10 Properties owned as of December 31, 2018 were leased to Wendgusta. Since more than 80% of the Properties, both by historical asset value and number, are leased to Wendy’s franchisees, the financial status of the tenant may be considered relevant to investors. At the request of the Partnership, Wendgusta provided it with a copy of its reviewed financial statements for the fiscal years ended December 30, 2018 and December 31, 2017. Those reviewed financial statements are attached to this Annual Report on Form 10-K as Exhibit 99.0. |
| (5) | Two of the 10 Properties owned by the Partnership as of December 31, 2018 were leased to Wendcharles I. Since more than 80% of the Properties, both by historical asset value and number, are leased to Wendy’s franchisees, the financial status of the tenant may be considered relevant to investors. At the request of the Partnership, Wendcharles I provided it with a copy of its reviewed financial statements for the fiscal years ended December 30, 2018 and December 31, 2017. Those reviewed financial statements are attached to this Annual Report on Form 10-K as Exhibit 99.1. |
| (6) | The lease for this Property commenced on September 30, 2018. The first 12 months’ rent has been abated per the terms of the First Amendment to lease dated January 15, 2019. |
The following summarizes significant developments, by property, for Properties with such developments.
Applebee’s - Columbus, OH Property
The tenant for the Property operated as an Applebee’s restaurant has been in Chapter 11 bankruptcy since May 2018. In January 2019, the tenant filed with the court to continue with the Partnership’s lease without modification.
Brakes 4 Less – Martinez, GA Property
On September 30, 2018, the Partnership entered into an agreement with Brakes4Less of Columbia, Inc. to lease, on a triple net basis, the Property located at 3859 Washington Road in Martinez, Georgia. The tenant is currently finalizing construction. The lease for that Property is for an eleven-year term and provides for annual rent of $60,000, with periodic rent escalations. Per the terms of the first amendment to lease dated January 15, 2019, the rent is abated for the first twelve months of the lease, and rent is expected to commence in May 2020. The General Partner expects the Brakes 4 Less store to open for business in May 2019.
Wendy’s – Peach Orchard Road, Augusta, GA Property
On July 4, 2018, a fire occurred at the Property located at 3013 Peach Orchard Road in Augusta, Georgia, which is leased to a Wendy’s franchisee, Wendgusta, LLC (the “Peach Orchard Road Tenant”), resulting in a total destruction, as defined in the lease with the Peach Orchard Road Tenant. The Peach Orchard Road Tenant anticipates that the restaurant will be closed until approximately May 2019 while the building is reconstructed. The Peach Orchard Road Tenant maintains insurance on the Property. Under the lease for this Property, the Peach Orchard Road Tenant is responsible for the cost of repairing or rebuilding the structure on the Property.
On July 26, 2018, the Partnership and the Peach Orchard Road Tenant entered into a lease amendment (the “Amendment”). Pursuant to the Amendment, among other things, (1) the base rent and percentage rent will continue to be due and payable from the date of the casualty through the reconstruction period, (2) the Peach Orchard Road Tenant is obligated to pay the total costs of rebuilding the store as a prototype Wendy’s, provided that such plans, costs and timeline for completion are approved in advance by the Partnership, and (3) the final settlement of the insurance claim requires the consent of the Partnership.
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Construction has commenced, and the new Wendy’s at the Peach Orchard Road Property is expected to be open by May 2019. Although the Partnership had negotiated for a continuation of fixed rent throughout the closed period, the Partnership is projected to lose significant percentage rents from this tenant in 2019 (approximately $60,000).
Other Property Information
Property taxes, general maintenance, insurance and ground rent on the Properties are the responsibility of the respective tenants. However, when a tenant fails to make the required tax payments or when a property becomes vacant, the Partnership makes the appropriate property tax payments to avoid possible foreclosure of the property. During a property vacancy, the Partnership pays for insurance and maintenance related to the vacant property.
As of the date of this report there are no material pending legal proceedings to which the Partnership is a party.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
| (a) | Although from time to time some Interests have been traded, there is no active public market for the Interests, and it is not anticipated that an active public market for the Interests will develop. |
| (b) | As of March 31, 2019, there were 1,216 record holders of Interests. |
| (c) | The Partnership does not pay dividends. However, the Partnership Agreement provides for net income and loss of the Partnership to be allocated on a quarterly basis, 99% to the limited partners and 1% to the General Partner. The Partnership Agreement provides for the distribution of net cash receipts and net proceeds to the limited partners and General Partner on a quarterly basis, subject to the limitations on distributions to the General Partner described in the Partnership Agreement. See Note 3 to the financial statements for further information. The Partnership anticipates continuing to make distributions to limited partners and the General Partner in future periods in accordance with the terms of the Partnership Agreement. |
| (d) | The Partnership has no equity compensation plans under which equity securities of the Partnership have been issued or are reserved for issuance. |
Item 6. Selected Financial Data
Not Applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but are the intent, belief or current expectations of the Partnership’s management based on its knowledge and understanding of the business and industry. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
Examples of forward-looking statements include, but are not limited to, statements we make regarding:
| ● | our expectations regarding financial condition or results of operations in any future period; | |
| ● | our future sources of, and needs for, liquidity and capital resources; | |
| ● | our expectations regarding economic and business conditions; | |
| ● | our business strategies and our ability to grow our business; | |
| ● | our decisions and policies with respect to the potential retention or disposition of one or more Properties; | |
| ● | our ability to find a suitable purchaser for any marketed Properties; | |
| ● | our ability to agree on an acceptable purchase price or contract terms; | |
| ● | our ability to collect rents on our leases; | |
| ● | our ability to maintain relationships with our tenants, and when necessary identify new tenants; and | |
| ● | our future capital expenditures. |
Forward-looking statements may ultimately differ materially from the actual results. The Partnership cautions readers not to place undue reliance on forward-looking statements, which reflect management’s view only as of the date of this Form 10-K. All subsequent written and oral forward-looking statements attributable to the Partnership, or persons acting on the Partnership’s behalf, are expressly qualified in their entirety by this cautionary statement. Management undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-K include, without limitation, changes in general economic conditions, changes in real estate conditions, including without limitation, decreases in valuations of real properties, increases in property taxes, inability of the General Partner to find a suitable purchaser for any marketed Properties, inability to agree on an acceptable purchase price or contract terms, lease-up risks, ability of tenants to fulfill their obligations to the Partnership under existing leases, sales levels of tenants whose leases include a percentage rent component, adverse changes to the restaurant market, entrance of competitors to the Partnership’s lessees in markets in which the Properties are located, inability to obtain new tenants upon the expiration of existing leases, the potential need to fund tenant improvements or other capital expenditures out of operating cash flows, and such other factors and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”).
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Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations is based upon the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires persons performing the functions of the Partnership’s management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates, including investment impairment. These estimates are based on the General Partner’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The Partnership believes that its most significant accounting policies pertain to:
Depreciation methods and lives- Depreciation of the properties is provided on a straight-line basis over the estimated useful life of the buildings and improvements. While the Partnership believes these are the appropriate lives and methods, use of different lives and methods could result in different impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance. As a result, depreciated book value of real estate may not reflect the market value of real estate assets.
Revenue recognition- Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease when collectability is assured. Percentage rents are accrued only when the tenant has reached the sales breakpoint stipulated in the lease.
Impairment-The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, if deemed necessary, a provision for possible loss is recognized.
Investment Properties
As of December 31, 2018, the Partnership owned 10 Properties, nine of which feature tenants that are franchisees of casual restaurants. The following are operated at the aforementioned nine Properties: eight Wendy’s restaurants, and an Applebee’s restaurant. The Property in Martinez, GA is leased to Brakes4Less of Columbia, Inc. as of September 30, 2018. The Properties are located in a total of three states.
Property taxes, general maintenance, insurance and ground rent on the Properties are the responsibility of the respective tenants. A more detailed discussion of tax payments, insurance and ground rent is provided in Item 2, and incorporated herein by this reference.
There were no building improvements capitalized during 2018 or 2017.
In accordance with Financial Accounting Standards Board (“FASB”) guidance for “Accounting for the Impairment or Disposal of Long-Lived Assets”, current and historical results from operations for disposed properties and assets classified as held for sale are reclassified separately as discontinued operations. The guidance also requires the adjustment to carrying value of properties due to impairment in an attempt to reflect appropriate market values.
Further Information
A summary of significant developments as of December 31, 2018, by property, for properties with such developments, can be found in Item 2, Properties.
Net Income
Net income for the fiscal years ended December 31, 2018 and 2017 were $362,504 and $687,499, respectively. Net income per Interest for the fiscal years ended December 31, 2018 and 2017 were $7.75 and $14.71, respectively.
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Net income for the fiscal years ended December 31, 2018 and 2017 included the results from both operations and discontinued operations. Assets disposed of, or deemed to be classified as held for sale, require the reclassification of current and previous years’ operations to discontinued operations in accordance with GAAP applicable to “Accounting for the Impairment or Disposal of Long Lived Assets”. As such, prior year operating results for those Properties considered as held for sale or Properties no longer considered for sale have been reclassified to conform to the current year presentation without affecting total net income. When Properties are considered held for sale, depreciation of the properties is discontinued, and the properties are valued at the lower of the depreciated cost or fair value, less costs to dispose.
Results of Operations
Net income from continuing operations for the fiscal years ended December 31, 2018 and 2017 were $362,504 and $703,481, respectively. See the paragraphs below for further information as to variances in individual operating income and expense items.
Fiscal year ended December 31, 2018 as compared to fiscal year ended December 31, 2017:
Operating Rental Income: Operating rental income for the fiscal years ended December 31, 2018 and 2017 was $1.384 and $1.484 million, respectively. The rental income was comprised of monthly lease obligations per the tenant leases, and percentage rents obligations related to operating tenants who had reached their sales breakpoint. The decrease in 2018 compared to 2017 was due to the vacancy of the Martinez, GA property until September 2018, coupled with the June 2018 expiration of the KFC lease in Palo Alto, NM. In addition, percentage rents were lower than usual due to the closure of the Wendy’s at the Peach Orchard Road Property as a result of the fire on July 4, 2018.
Management expects total base operating rental income to be approximately $820,380 for the 2019 fiscal year based on operating leases currently in place. Future operating rental income has the potential to either decrease or increase. Future operating rental income may decrease with a tenant default and/or we may reclassify certain additional properties as properties held for sale. Future operating rental income may also increase with additional rents due from tenants, if those tenants experience increased sales levels, which require the payment of additional rent to the Partnership. Operating percentage rents included in operating rental income in the fiscal years ended December 31, 2018 and 2017 were $533,344 and $595,399, respectively. Management expects percentage rents for the fiscal year ending December 31, 2019 to be comparable to those received in 2018 due to the continued closure of the Wendy’s at the Peach Orchard Road Property during its rebuild, which is expected to be completed during the second quarter of 2019.
Partnership Management Fees Expense: Partnership management fees expense for the fiscal years ended December 31, 2018 and 2017 were $275,472 and $270,110, respectively. The General Partner receives a fee for managing the Partnership, and this fee changes each year based on the Consumer Price Index. See Note 5, Transactions with General Partner and Its Affiliates, for further information.
Insurance Expense: Insurance expense for the fiscal years ended December 31, 2018 and 2017 was $8,894 and $5,643, respectively. Insurance expense was comprised of property and general liability insurance during 2018 due to the vacancy in Martinez, GA. Each tenant is responsible for insurance protection and the Partnership only purchases property insurance for an individual property if the tenant cannot provide proof of insurance protection or due to a property vacancy. For the fiscal year ending December 31, 2019, management expects operating insurance expense to be approximately $6,100. This amount could increase upon a property insurance default or vacancy by a tenant or an increase in the general liability insurance premium for the 2019/2020 insurance year, which is expected to be paid in the fourth quarter of 2019.
General and Administrative Expense: General and administrative expenses for the fiscal years ended December 31, 2018 and 2017 were $63,444 and $61,356, respectively. General and administrative expenses were comprised of management expense, state/city registration and annual report filing fees, office supplies and printing costs, outside storage expenses, copy/fax costs, postage and shipping expenses, long-distance telephone expenses, website fees, bank fees and state income tax expenses. Total operating general and administrative expenses for the fiscal year ended December 31, 2018 were higher than in the fiscal year ended December 31, 2017, primarily due to increased registration/filing fees expense which was partially offset by the decrease in income tax expense. Management expects the total operating general and administrative expenses for the fiscal year ending December 31, 2019 to be about $10,000 lower than for the fiscal year ended December 31, 2018 due to an expected decrease in both filing fees and income tax expense costs.
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Professional Services: Professional services expenses for the fiscal years ended December 31, 2018 and 2017 were $469,234 and $282,927, respectively. Professional service expenses were primarily comprised of investor relations data processing, investor mailings processing, website design, legal, auditing and tax preparation fees, electronic tax filings, and SEC report conversion and processing fees. The General Partner anticipates that total professional services expenses for the fiscal year ending December 31, 2019 will be at least $200,000 lower than incurred for the fiscal year ended December 31, 2018. The costs in 2018 were significantly higher than historical figures from prior years due to one-time costs like environmental inspections, title, survey and legal fees that were incurred in connection with the proposed sale of assets, liquidation and dissolution of the Partnership.
Results of Discontinued Operations
In accordance with FASB guidance for “Accounting for the Impairment or Disposal of Long Lived Assets”, discontinued operations represent the operations of properties disposed of or classified as held for sale as well as any gain or loss recognized in their disposition. During the fiscal years ended December 31, 2018 and 2017, the Partnership income (loss) from discontinued operations of $0 and ($15,982), respectively. The 2017 loss from discontinued operations was attributable to the Martinez, GA Property which had been held for sale as of December 15, 2016 through June 17, 2018. The Martinez, GA Property is now leased as of September 30, 2018, as described above. See the components of discontinued operations included in the statements of income for the years ended December 31, 2018 and 2017 in Note 2 Investment Properties and Property Held for Sale.
The General Partner does not anticipate incurring any discontinued operations expenditures in 2019 because the Martinez, GA Property is now leased.
Cash Flow Analysis
Net cash flows provided by continuing operating activities for the fiscal years ended December 31, 2018 and 2017 were $612,026 and $727,167, respectively. Cash flows from operating activities was lower in 2018 primarily due to much lower net income versus the prior year. Cash provided from (used in) discontinued operations for the fiscal years ended December 31, 2018 and 2017 were $0 and ($15,982), respectively
Property impairment write-downs, depreciation and amortization are non-cash items and do not affect the current operating cash flow of the Partnership or distributions to the limited partners.
Cash flows used in investing activities for the fiscal years ended December 31, 2018 and 2017 were $6,889 and $3,129, respectively. The amounts were comprised entirely of earnings from the indemnification trust account.
For the fiscal year ended December 31, 2018, cash flows used in financing activities were $651,451 and consisted of aggregate limited partner distributions of $650,000 and General Partner distributions of $1,451. For the fiscal year ended December 31, 2017, cash flows used in financing activities were $762,751 and consisted of aggregate limited partner distributions of $760,000 and General Partner distributions of $2,751. Both limited partner and General Partner distributions have been, and will continue to be, made in accordance with the Partnership Agreement. Management anticipates that aggregate limited partner distributions will be approximately $800,000 during 2019.
Liquidity and Capital Resources
The Partnership’s cash balance was $99,360 at December 31, 2018. Cash of approximately $35,000 is anticipated to be used in 2019 for the payment of quarter-end accrued liabilities which are included in the balance sheets. The remainder represents amounts deemed necessary to allow the Partnership to operate normally.
The Partnership’s principal demands for funds historically have been, and are expected to continue to be, for the payment of operating expenses and distributions. Management anticipates that cash generated through the operations of the Properties and potential sales of Properties will primarily provide the sources for future liquidity and limited partner distributions. During the process of leasing the Properties, the Partnership may experience competition from owners and managers of other similarly situated properties. As a result, in connection with negotiating tenant leases, along with recognizing market conditions, management may offer rental concessions, or other inducements, which may have an adverse impact on the results of the Partnership’s operations. The Partnership is also in competition with sellers of similar properties to locate suitable purchasers for its Properties. The two primary liquidity risks in the absence of mortgage debt are the Partnership’s inability to collect rent receivables and near- term or chronic property vacancies. The amount of cash to be distributed to our limited partners is determined by the General Partner and is dependent on a number of factors, including funds available for payment of distributions, capital expenditures, and taxable income recognition matching, which is primarily attributable to percentage rents and property sales.
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As of December 31, 2018 and 2017, the Properties were leased 100% and 91%, respectively. In addition, the Partnership collected 100% of its base rent due from current operating tenants for the fiscal years ended December 31, 2018 and 2017, which we believe is a good indication of overall tenant quality and stability. There are no leases set to expire in 2019. However, per the terms of the first amendment to lease dated January 15, 2019, the rent for the Martinez, GA Property is abated for the first twelve months of the lease, and rent is expected to commence in May 2020. Further, although the new Wendy’s at the Peach Orchard Road Property is expected to be open by May 2019 and the Partnership had negotiated for a continuation of fixed rent throughout the closed period, the Partnership is projected to lose significant percentage rents from this tenant in 2019 (approximately $60,000).
In January 2017, the Partnership received lease extension notices relating to seven of the eight Properties that are leased to Wendy’s franchisees. Pursuant to such notices, each of Wendgusta, LLC, Wendcharles I, LLC and Wendcharles II, LLC exercised the option in their respective property leases to renew such lease for five years beyond the prior expiration date of November 6, 2021. As a result, all eight of the Properties that are leased to Wendy’s franchisees now feature a lease expiration date of November 6, 2026. See Item 2, Properties for further information regarding Properties with significant developments during the year ended December 31, 2018.
Eight of the 10 Properties are operated as Wendy’s fast food restaurants and are franchises of the international Wendy’s Company. Operating base rents from these eight leases comprised approximately 80% of the total 2018 operating base rents included in operating rental income of the Partnership. During the year ended December 31, 2018, additional percentage rents totaled $528,372, all of which were unbilled and were accrued in relation to the Properties operated as Wendy’s restaurants. Therefore, during 2018, the Partnership generated approximately 87% of its total operating revenues from those eight Properties.
The Partnership’s return on its investment historically has been, and is expected to continue to be, derived principally from rental payments received from its lessees. Therefore, the Partnership’s return on its investment historically is largely dependent upon the business success of its lessees. The business success of the Partnership’s individual lessees can be adversely affected on at least three general levels. First, the tenants rely heavily on the management contributions of a few key entrepreneurial owners. The business operations of such entrepreneurial tenants can be adversely affected by death, disability or divorce of a key owner, or by such owner’s poor business decisions such as an undercapitalized business expansion. Second, changes in a local market area can adversely affect a lessee’s business operation. A local economy can suffer a downturn with high unemployment. Socioeconomic neighborhood changes can affect retail demand at specific sites and traffic patterns may change, or stronger competitors may enter a market. These and other local market factors can potentially adversely affect the lessees of the Properties. Finally, despite an individual lessee’s solid business plans in a strong local market, the franchise concept itself can suffer reversals or changes in management policy, which in turn can affect the profitability of operations. An overall economic recession is another factor that could affect the relative success of a lessee’s business. Therefore, there can be no assurance that any specific lessee will have the ability to pay its rent over the entire term of its lease with the Partnership.
Since nine Properties are leased to restaurant tenants, the restaurant market is the major market segment with a material impact on Partnership operations. The success of customer marketing and the operating effectiveness of the Partnership’s lessee’s, will impact the Partnership’s future operating success in a very competitive restaurant and food service marketplace.
There is no way to determine, with any certainty, which, if any, tenants will succeed or fail in their business operations over the term of their respective leases with the Partnership. Economic volatility, either locally or nationally, may affect a lessee’s operational activity and its ability to meet lease obligations. Based on past experience, it can be reasonably anticipated that some lessees will default on future lease payments to the Partnership, which will result in the loss of expected lease income for the Partnership. The General Partner will use its best efforts to vigorously pursue collection of any defaulted amounts and to protect the Partnership’s assets and future rental income potential by trying to re-lease any properties with rental defaults. External events, which could impact the Partnership’s liquidity, include the entrance of other competitors into the market areas of our tenants; liquidity and working capital needs of the lessees; and failure or withdrawal of any of the national franchises operated by the Partnership’s tenants. Each of these events, alone or in combination, would affect the liquidity level of the lessees resulting in possible default by a tenant. Since the information regarding plans for future liquidity and expansion of closely held organizations, which are tenants of the Partnership, tend to be of a private and proprietary nature, anticipation of individual liquidity problems is difficult.
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The credit environment has continued to be difficult for certain borrowers. Fortunately, the Partnership has limited exposure to the credit markets, as the Partnership has no mortgage debt. The General Partner believes that the Partnership’s liquid assets have been deposited with creditworthy financial institutions. However, the economic environment at any time and any lack of available credit could delay or inhibit the General Partner’s ability to dispose of any of the Properties, or cause management to feel compelled to dispose of Properties for a lower than anticipated return. As a result, the General Partner continues to maintain an objective to preserve capital and sustain property values while from time to time disposing of certain of the Properties as appropriate.
Off-Balance Sheet Arrangements
The Partnership does not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Disposition Policies
In deciding whether to sell a Property, the General Partner considers factors such as potential capital appreciation or depreciation, market and economic conditions and the general strength of the real estate market, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to the limited partners. The General Partner may exercise its discretion as to whether and when to sell a Property, and there is no obligation to sell any of the Properties at any particular time, except upon Partnership dissolution currently scheduled for November 30, 2020 pursuant to the Partnership Agreement.
Inflation
To the extent that tenants can pass through commodity inflation in their sales prices, the Partnership will benefit from additional percentage rent from increased sales. The majority of the Partnership’s leases have percentage rental clauses. Revenues from operating percentage rentals represented 38% of operating rental income for the fiscal year ended December 31, 2018, and 40% of operating rental income for the fiscal years ended December 31, 2017. If, however, inflation causes sales to decrease, operating margins to deteriorate for lessees, or if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults.
Due to the “triple-net” nature of the property leases, asset values generally move inversely with interest rates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not subject to market risk as defined by Item 305 of Regulation S-K.
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Item 8. Financial Statements and Supplementary Data
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(A Wisconsin limited partnership)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management and the Advisory Board
DiVall Insured Income Properties 2 Limited Partnership
Opinion on the Financial Statements
We have audited the accompanying balance sheets of DiVall Insured Income Properties 2 Limited Partnership (the “Company”) as of December 31, 2018 and 2017, and the related statements of income, partners’ capital, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
The Partnership is scheduled to be dissolved on November 30, 2020, or earlier upon the prior occurrence of some events, as described in Note 1 to the accompanying financial statement.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP
We have served as the Company’s auditor since 2014.
New York, New York
April 1, 2019
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
December 31, 2018 and 2017
ASSETS
| December 31, 2018 | December 31, 2017 | |||||||
| INVESTMENT PROPERTIES: (Note 2) | ||||||||
| Land | $ | 2,794,122 | $ | 2,527,947 | ||||
| Buildings | 4,017,412 | 4,101,067 | ||||||
| Accumulated depreciation | (3,776,718 | ) | (3,745,299 | ) | ||||
| Net investment properties | $ | 3,034,816 | $ | 2,883,715 | ||||
| OTHER ASSETS: | ||||||||
| Cash | $ | 99,360 | $ | 145,674 | ||||
| Cash held in Indemnification Trust (Note 8) | 464,710 | 457,821 | ||||||
| Security deposits escrow | 74,681 | 64,513 | ||||||
| Rents and other receivables | 533,344 | 595,399 | ||||||
| Deferred tenant award proceeds escrow | 64,041 | 85,617 | ||||||
| Prepaid insurance | 5,133 | 5,187 | ||||||
| Utility deposit | 6,530 | 6,530 | ||||||
| Properties held for sale | - | 317,151 | ||||||
| Deferred charges, net | 186,517 | 210,593 | ||||||
| Total other assets | $ | 1,434,316 | $ | 1,888,485 | ||||
| Total assets | $ | 4,469,132 | $ | 4,772,200 | ||||
The accompanying notes are an integral part of these financial statements.
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 2018 and 2017
LIABILITIES AND PARTNERS’ CAPITAL
| December 31, 2018 | December 31, 2017 | |||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | 33,573 | $ | 30,507 | ||||
| Due to General Partner (Note 5) | 998 | 1,238 | ||||||
| Deferred rent | 62,183 | 84,130 | ||||||
| Security deposits | 74,340 | 64,340 | ||||||
| Unearned rental income | - | 5,000 | ||||||
| Total current liabilities | $ | 171,094 | $ | 185,215 | ||||
| CONTINGENCIES AND COMMITMENTS (Notes 7 and 8) | ||||||||
| PARTNERS’ CAPITAL: (Notes 1 and 3) | ||||||||
| General Partner - | ||||||||
| Cumulative net income (retained earnings) | $ | 368,941 | $ | 365,316 | ||||
| Cumulative cash distributions | (152,900 | ) | (151,449 | ) | ||||
| $ | 216,041 | $ | 213,867 | |||||
| Limited Partners (46,280.3 interests outstanding at December 31, 2018 and December 31, 2017) | ||||||||
| Capital contributions | $ | 46,280,300 | $ | 46,280,300 | ||||
| Offering costs | (6,921,832 | ) | (6,921,832 | ) | ||||
| Cumulative net income (retained earnings) | 42,891,026 | 42,532,147 | ||||||
| Cumulative cash distributions | (77,327,268 | ) | (76,677,268 | ) | ||||
| $ | 4,922,226 | $ | 5,213,347 | |||||
| Former General Partner - | ||||||||
| Cumulative net income (retained earnings) | $ | 707,513 | $ | 707,513 | ||||
| Cumulative cash distributions | (1,547,742 | ) | (1,547,742 | ) | ||||
| $ | (840,229 | ) | $ | (840,229 | ) | |||
| Total partners’ capital | $ | 4,298,038 | $ | 4,586,985 | ||||
| Total liabilities and partners’ capital | $ | 4,469,132 | $ | 4,772,200 | ||||
The accompanying notes are an integral part of these financial statements.
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
For the Years Ended December 31, 2018 and 2017
| 2018 | 2017 | |||||||
| OPERATING REVENUES: | ||||||||
| Rental income (Note 4) | $ | 1,383,724 | $ | 1,483,879 | ||||
| TOTAL OPERATING REVENUES | $ | 1,383,724 | $ | 1,483,879 | ||||
| EXPENSES: | ||||||||
| Partnership management fees (Note 5) | $ | 275,472 | $ | 270,110 | ||||
| Insurance | 8,894 | 5,643 | ||||||
| General and administrative | 63,444 | 61,356 | ||||||
| Advisory Board fees and expenses | 10,500 | 10,500 | ||||||
| Professional services | 469,234 | 282,927 | ||||||
| Other property expenses | 11,537 | - | ||||||
| Depreciation | 166,050 | 124,142 | ||||||
| Amortization | 24,077 | 30,014 | ||||||
| TOTAL OPERATING EXPENSES | $ | 1,029,208 | $ | 784,692 | ||||
| Other interest income | $ | 7,988 | $ | 4,294 | ||||
| TOTAL OTHER INCOME | $ | 7,988 | $ | 4,294 | ||||
| INCOME FROM CONTINUING OPERATIONS | $ | 362,504 | $ | 703,481 | ||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 2) | $ | - | $ | (15,982 | ) | |||
| NET INCOME | $ | 362,504 | $ | 687,499 | ||||
| NET INCOME- GENERAL PARTNER | 3,625 | 6,875 | ||||||
| NET INCOME- LIMITED PARTNERS | $ | 358,879 | $ | 680,624 | ||||
| PER LIMITED PARTNERSHIP INTEREST, | ||||||||
| Based on 46,280.3 interests outstanding: | ||||||||
| INCOME FROM CONTINUING OPERATIONS | $ | 7.75 | $ | 15.05 | ||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS | $ | - | $ | (0.34 | ) | |||
| NET INCOME PER LIMITED PARTNERSHIP INTEREST | $ | 7.75 | $ | 14.71 | ||||
The accompanying notes are an integral part of these financial statement
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS’ CAPITAL
For the years ended December 31, 2018 and 2017
| General Partner | Limited Partners | |||||||||||||||||||||||||||||||||||
| Cumulative Net Income | Cumulative Cash Distributions | Total | Capital Contributions, Net of Offering Costs | Cumulative Net Income | Cumulative Cash Distribution | Reallocation | Total | Total Partners’ Capital | ||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2016 | $ | 358,441 | $ | (148,698 | ) | $ | 209,743 | $ | 39,358,468 | $ | 41,851,523 | $ | (75,917,268 | ) | $ | (840,229 | ) | $ | 4,452,494 | $ | 4,662,237 | |||||||||||||||
| Cash Distributions ($16.42 per limited partnership interest) | - | (2,751 | ) | (2,751 | ) | - | - | (760,000 | ) | - | (760,000 | ) | (762,751 | ) | ||||||||||||||||||||||
| Net Income | 6,875 | 6,875 | 680,624 | 680,624 | 687,499 | |||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2017 | $ | 365,316 | $ | (151,449 | ) | $ | 213,867 | $ | 39,358,468 | $ | 42,532,147 | $ | (76,677,268 | ) | $ | (840,229 | ) | $ | 4,373,118 | $ | 4,586,985 | |||||||||||||||
| Cash Distributions ($14.04 per limited partnership interest) | - | (1,451 | ) | (1,451 | ) | - | - | (650,000 | ) | - | (650,000 | ) | (651,451 | ) | ||||||||||||||||||||||
| Net Income | 3,625 | - | 3,625 | 358,879 | 358,879 | 362,504 | ||||||||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | $ | 368,941 | $ | (152,900 | ) | $ | 216,041 | $ | 39,358,468 | $ | 42,891,026 | $ | (77,327,268 | ) | $ | (840,229 | ) | $ | 4,081,997 | $ | 4,298,038 | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
For the Years Ended December 31, 2018 and 2017
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income from continuing operations | $ | 362,504 | $ | 703,481 | ||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | 190,127 | 154,156 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (Increase) in rents and other receivables | 62,055 | (14,075 | ) | |||||
| Increase in security deposit escrow | (10,168 | ) | (158 | ) | ||||
| Decrease in prepaid insurance | 54 | 5,948 | ||||||
| Decrease in accounts payable and accrued expenses | 3,065 | 5,108 | ||||||
| Decrease in unearned rental income | (5,000 | ) | - | |||||
| Decrease in deferred award escrow | (371 | ) | (469 | ) | ||||
| Payment of leasing commission | - | (126,820 | ) | |||||
| Security deposit receipt | 10,000 | - | ||||||
| Decrease in due to General Partner | (240 | ) | (4 | ) | ||||
| Net cash from operating activities | $ | 612,026 | $ | 727,167 | ||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Interest applied to Indemnification Trust account | $ | (6,889 | ) | $ | (3,129 | ) | ||
| Net cash (used in) provided from investing activities | $ | (6,889 | ) | $ | (3,129 | ) | ||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Cash distributions to Limited Partners | $ | (650,000 | ) | $ | (760,000 | ) | ||
| Cash distributions to General Partner | (1,451 | ) | (2,751 | ) | ||||
| Net cash used in financing activities | $ | (651,451 | ) | $ | (762,751 | ) | ||
| CASH PROVIDED FROM (USED IN) DISCONTINUED OPERATIONS | $ | - | $ | (15,982 | ) | |||
| NET DECREASE IN CASH | (46,314 | ) | (54,695 | ) | ||||
| CASH AT BEGINNING OF YEAR | $ | 145,674 | $ | 200,369 | ||||
| CASH AT END OF YEAR | $ | 99,360 | $ | 145,674 | ||||
| CASH PAID FOR INTEREST | $ | - | $ | - | ||||
| CASH PAID FOR TAXES | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | $ | - | $ | - | ||||
The accompanying notes are an integral part of these financial statements.
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
DECEMBER 31, 2018 AND 2017
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DiVall Insured Income Properties 2 Limited Partnership (the “Partnership”) was formed on November 20, 1987, pursuant to the Uniform Limited Partnership Act of the State of Wisconsin. The initial capital, contributed during 1987, consisted of $300, representing aggregate capital contributions of $200 by the former general partners and $100 by the initial Limited Partner. A subsequent offering of limited partnership interests (closed on February 22, 1990, with 46,280.3 limited partnership interests (“Interests”) having been sold in that offering, resulting in total proceeds to the Partnership, net of underwriting compensation and other offering costs, of $39,358,468.
The Partnership is currently engaged in the business of owning and operating its investment portfolio of commercial real estate properties (the “Properties”). The Properties are leased on a triple net basis primarily to, and operated by, franchisors or franchisees of national, regional, and local retail chains under primarily long-term leases. Nine lessees are fast food, family style, and casual/theme restaurants, with the tenth lessee being an automotive supply store. As of December 31, 2018, the Partnership owned 10 Properties, which are located in a total of three states.
The Partnership is scheduled to be dissolved on November 30, 2020, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all its Properties; (b) the written determination by the General Partner, that the Partnership’s assets may constitute “plan assets” for purposes of ERISA; (c) the agreement of limited partners owning a majority of the outstanding limited partner interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority of the limited partners. During the second and third quarters of the nine odd numbered years from 2001 through 2017, consent solicitations were circulated to the Partnership’s limited partners which, if approved by the limited partners, would have authorized the General Partner to initiate the potential sale of all of the Properties and the dissolution of the Partnership (each a “Consent”). Limited partners owning a majority of the outstanding Interests did not vote in favor of any of the Consents. Therefore, the Partnership continues to operate as a going concern.
On May 18, 2018, the Partnership concluded a special consent solicitation process in which it solicited affirmative consents from the limited partners to authorize the General Partner to sell all or substantially all of the Partnership’s properties, and to subsequently liquidate and dissolve the Partnership upon completion of the sale (collectively, the “Transaction”). The Transaction was approved by written consent of the holders of a majority of the outstanding limited partnership interests. On July 24, 2018, the Partnership mailed to interested parties a confidentiality agreement and a letter that included procedures, terms and conditions (the “Procedures”) for a sealed bid sale for the potential sale of the Properties. Under the Procedures communicated to all prospective bidders, the deadline for submitting bids complying with the Procedures was September 28, 2018 (the “Bid Deadline”).
On October 2, 2018, the General Partner determined that no bid response received by the Bid Deadline satisfied the terms and conditions of the Procedures. Accordingly, the General Partner determined it was in the best interests of the Partnership to suspend its efforts with respect to consummating the Transaction, and the sealed bid process was terminated due to failure to receive a compliant bid.
Significant Accounting Policies
Rental revenue from the Properties is recognized on the straight-line basis over the term of the respective lease. Percentage rents are only accrued when the tenant has reached the sales breakpoint stipulated in the lease.
Rents and other receivables are comprised of billed but uncollected amounts due for monthly rents and other charges, and amounts due for scheduled rent increases for which rentals have been earned and will be collected in the future under the terms of the leases. Receivables are recorded at management’s estimate of the amounts that will be collected.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), an updated standard on revenue recognition. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The standard requires expanded disclosure surrounding revenue recognition. The standard was initially to be effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Deferral of Effective Date, which delays the effective date of ASU 2014-09 by one year to fiscal periods beginning after December 15, 2017. The Company adopted ASU 2014-09 using the modified retrospective transition method in the first quarter of 2018 and such adoption did not have a material impact on the Company’s financial statements. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
As of December 31, 2018 and 2017 there were no values for allowance for doubtful accounts based on an analysis of specific accounts and historical experience.
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The Partnership considers its operations to be in only one segment, the operation of a portfolio of commercial real estate leased on a triple net basis, and therefore no segment disclosure is made.
Depreciation of the Properties is provided on a straight-line basis over the estimated useful lives of the buildings and improvements.
Deferred charges represent leasing commissions paid when the Properties are leased and upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the term of the lease. As of December 31, 2018 and 2017, accumulated amortization amounted to $48,821 and $33,843, respectively. Fully amortized deferred charges of $9,099, including related accumulated amortization, were removed from the balance sheets as of December 31, 2017.
Deferred tenant award proceeds escrow represents the portion of the award proceeds from the sale of the portion of the Mt. Pleasant, South Carolina property that are being paid to the tenant ratably over 99 months beginning August 1, 2013.
The Partnership generally maintains cash in federally insured accounts which, at times, may exceed federally insured limits. The Partnership has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk.
Financial instruments that potentially subject the Partnership to significant concentrations of credit risk consist primarily of cash investments and leases. As of December 31, 2018, eight of the Partnership’s 10 Properties are leased to three significant tenants, Wendgusta, LLC (“Wendgusta”), Wendcharles I, LLC (“Wendcharles I”) and Wendcharles II, LLC (“Wendcharles II”), all three of whom are Wendy’s restaurant franchisees. The property lease(s) for these three tenants comprised approximately 54%, 17% and 9%, respectively, of the Partnership’s total 2018 operating base rents reflected for the fiscal year ended December 31, 2018.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Assets disposed of or deemed to be classified as held for sale require the reclassification of current and previous years’ operations to discontinued operations in accordance with GAAP applicable to “Accounting for the Impairment or Disposal of Long Lived Assets”. As such, prior year operating results for those properties considered as held for sale or properties no longer considered for sale have been reclassified to conform to the current year presentation without affecting total income. When properties are considered held for sale, depreciation of the properties is discontinued, and the properties are valued at the lower of the depreciated cost or fair value, less costs to dispose. If circumstances arise that were previously considered unlikely, and, as a result, the property previously classified as held for sale is no longer to be sold, the property is reclassified as held and used. Such property is measured at the lower of its carrying amount (adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used) or fair value at the date of the subsequent decision not to sell.
Assets are classified as held for sale, generally, when all criteria within GAAP applicable to “Accounting for the Impairment or Disposal of Long Lived Assets” have been met.
The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership’s review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, a provision for possible loss is recognized, if any. There were no adjustments to carrying values for the fiscal years ended December 31, 2018 and 2017.
The Financial Accounting Standards Board (“FASB”) guidance on “Fair Value Measurements and Disclosure”, defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. The adoption of the provisions of this FASB issuance, with respect to nonrecurring fair value measurements of nonfinancial assets and liabilities, including (but not limited to) the valuation of reporting units for the purpose of assessing goodwill impairment and the valuation of property and equipment when assessing long-lived asset impairment, did not have a material impact on how the Partnership estimated its fair value measurements but did result in increased disclosures about fair value measurements in the Partnership’s financial statements as of and for the years ended December 31, 2018 and 2017. See Note 9 for further disclosure.
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GAAP applicable to disclosure about fair value of financial instruments requires entities to disclose the fair value of all financial assets and liabilities for which it is practicable to estimate. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The General Partner believes that the carrying value of the Partnership’s assets (exclusive of the Properties) and liabilities approximate fair value due to the relatively short maturity of these instruments.
No provision for federal income taxes has been made, as any liability for such taxes would be that of the individual partners rather than the Partnership. At December 31, 2018, the tax basis of the Partnership’s assets exceeded the amounts reported in the December 31, 2018 financial statements by approximately $6,921,832.
The following represents an unaudited reconciliation of net income as stated on the Partnership statements of income to net income for tax reporting purposes:
| 2018 | 2017 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net income, per statements of income | $362,504 | $687,499 | ||||||
| Book to tax depreciation difference | 13,841 | (53,932 | ) | |||||
| Tax over (under) Book gain from asset disposition | (32,745 | ) | - | |||||
| Straight line rent adjustment | - | - | ||||||
| Penalties | - | - | ||||||
| Prepaid rent | (26,947 | ) | (21,947 | ) | ||||
| Bad Debts | - | - | ||||||
| Other expense/deduction items with differences | - | - | ||||||
| Net income for tax reporting purposes | $ | 316,653 | $ | 611,620 | ||||
The Partnership is not subject to federal income tax because its income and losses are includable in the tax returns of its partners, but may be subject to certain state taxes. FASB has provided guidance for how uncertain tax positions should be recognized, measured, disclosed and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the entity’s tax returns to determine whether the tax positions are more-likely-than-not to be sustained when challenged or when examined by the applicable taxing authority. Management has determined that there were no material uncertain income tax positions. Tax returns filed by the Partnership generally are subject to examination by U.S. and state taxing authorities for the years ended after December 31, 2015.
Ohio - Commercial Activates Tax CAT
The Commercial Activity Tax (CAT) is an annual tax imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio. Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year are subject to the CAT tax. Such “taxable gross receipts”, include i) gross rents and royalties from real property located in Ohio, and ii) gross receipts from the sale of real property located in Ohio. For calendar years 2006 and thereafter, the first $1 million in taxable gross receipts are taxed at $150, thereafter at a rate of 0.2600%. For tax years prior to December 31, 2013, there is an annual minimum tax (AMT) of $150. Since the Partnership has not had gross receipts in excess of $150,000 for the periods ended December 31, 2018 and 2017, the CAT tax is not applicable to the Partnership for the periods indicated.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs (ASU No. 2011-04”). ASU No. 2011-04 updates and further clarifies requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively.
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2. INVESTMENT PROPERTIES AND PROPERTY HELD FOR SALE:
The total cost of the Properties includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners of the Partnership.
As of December 31, 2018, the Partnership owned 10 Properties, nine of which contained fully constructed fast-food/casual dining restaurant facilities. The following are operated by tenants at the aforementioned nine Properties: eight separate Wendy’s restaurants, and an Applebee’s restaurant. The tenant for the Property operated as an Applebee’s restaurant has been in Chapter 11 bankruptcy since May 2018. As of September 30, 2018, the Martinez, GA was leased by Brakes4Less of Columbia, Inc. The 10 Properties are located in a total of three states.
A summary of significant developments as of December 31, 2018, by Property, for Properties with such developments, can be found in Item 2, Properties.
Discontinued Operations
During the fiscal years ended December 31, 2018 and 2017, the Partnership recognized income (loss) from discontinued operations of $0 and ($15,982), respectively. The loss from discontinued operations was attributable to the Martinez, GA Property that was vacant and held for sale as of December 15, 2016 through June 17, 2018.
The components of property held for sale in the balance sheets as of December 31, 2018 and 2017 are $0 and $317,151, respectively. In 2018, the Martinez, GA property was reclassified back to continuing operations because it was no longer held for sale as of June 17, 2018 when the letter of intent was signed with Brakes4Less of Columbia, Inc.
December 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Balance Sheet: | ||||||||
| Land | $ | - | $ | 266,175 | ||||
| Buildings, net | - | 50,976 | ||||||
| Properties held for sale | $ | - | $ | 317,151 | ||||
The components of discontinued operations included in the statements of income for the years ended December 31, 2018 and 2017 are outlined below:
| December 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Revenues | ||||||||
| Base Rent | $ | - | $ | - | ||||
| Percentage Rent | - | - | ||||||
| Total Revenues | $ | - | $ | - | ||||
| Expenses | ||||||||
| Insurance | $ | - | $ | 1,426 | ||||
| Property tax expense | - | 6,078 | ||||||
| Maintenance expense | - | 6,828 | ||||||
| Depreciation | - | - | ||||||
| Amortization | - | - | ||||||
| Appraisals | - | 1,650 | ||||||
| Total Expenses | $ | - | $ | 15,982 | ||||
| Net Income from Discontinued Operations | $ | - | $ | (15,982 | ) | |||
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3. PARTNERSHIP AGREEMENT:
The Limited Partnership Agreement, as amended from time to time (collectively, the “Partnership Agreement”) was amended, effective as of November 9, 2009, to extend the term of the Partnership to November 30, 2020, or until dissolution prior thereto pursuant to the consent of the majority of the outstanding limited partnership interests.
Under the terms of the Partnership Agreement, net profits or losses from operations are allocated 99% to the limited partners and 1% to the current General Partner. The November 9, 2009 amendment also provided for distributions from Net Cash Receipts, as defined, to be made 99% to limited partners and 1% to the current General Partner, provided that quarterly distributions are cumulative and are not to be made to the current General Partner unless and until each limited partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to it attributable to such year.
The provisions regarding distribution of Net Proceeds, as defined, provide that Net Proceeds are to be distributed as follows: (a) to the limited partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the limited partners, an amount necessary to provide each limited partner a liquidation preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the extent needed by the General Partner to pay its federal and state income tax on the income allocated to it attributable to such year; and (c) then, to limited partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for distribution.
4. LEASES:
Original lease terms for the majority of the leased Properties were generally five to 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in the General Partner’s opinion, the Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when earned on a straight-line basis and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life.
As of December 31, 2018, the aggregate minimum operating lease payments to be received under the current operating leases for the Properties are as follows:
Year ending December 31,
| 2019 | 798,433 | |||
| 2020 | 835,933 | |||
| 2021 | 861,725 | |||
| 2022 | 881,130 | |||
| 2023 | 882,345 | |||
| Thereafter | 2,875,846 | |||
| $ | 7,135,412 |
5. TRANSACTIONS WITH GENERAL PARTNER AND ITS AFFILIATES:
Pursuant to the terms of the Permanent Manager Agreement (the “PMA”) executed in 1993 and renewed for an additional two-year term as of January 1, 2019, the General Partner receives a Base Fee for managing the Partnership equal to four percent of gross receipts, subject to an initial annual minimum amount of $159,000. The PMA also provides that the Partnership is responsible for reimbursement of the General Partner for office rent and related office overhead (“Expenses”) up to an initial annual maximum of $13,250. Both the Base Fee and Expense reimbursement are subject to annual Consumer Price Index based adjustments. Effective March 1, 2018, the minimum annual Base Fee and the maximum Expenses reimbursement increased by 2.13% from the prior year, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2018, the minimum annual Base Fee paid by the Partnership was raised to $276,432 and the maximum annual Expenses reimbursement was increased to $22,308.
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For purposes of computing the four percent overall fees, gross receipts include amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. The fees received from the Partnership on the amounts recovered reduce the four percent minimum fee by that same amount.
Amounts paid and/or accrued to the General Partner and its affiliates for the years ended December 31, 2018 and 2017, are as follows:
| Incurred for the | Incurred for the | |||||||
| Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
| General Partner | ||||||||
| Management fees | $ | 275,472 | $ | 270,110 | ||||
| Overhead allowance | 22,230 | 21,794 | ||||||
| Leasing commissions | 0 | 126,820 | ||||||
| Reimbursement for out-of-pocket expenses | 2,500 | 2,500 | ||||||
| Cash distribution | 1,451 | 2,751 | ||||||
| $ | 301,653 | $ | 423,975 | |||||
At December 31, 2018 and 2017, $998 and $1,238, respectively, were the distributions payable to the General Partner.
6. TRANSACTIONS WITH OWNERS WITH GREATER THAN TEN PERCENT BENEFICIAL INTERESTS:
As of December 31, 2018, an Advisory Board Member, Jesse Small, beneficially owns greater than ten percent of the Partnership’s outstanding limited partnership interests. Amounts paid to Mr. Small for the fiscal years ended December 31, 2018 and 2017 are as follows:
December 31, 2018 | December 31, 2017 | |||||||
| Advisory Board Fees paid | $ | 3,500 | $ | 3,500 | ||||
| $ | 3,500 | $ | 3,500 | |||||
At December 31, 2018 and 2017, there were no outstanding Advisory Board fees accrued and payable to Mr. Small.
7. CONTINGENT LIABILITIES:
According to the Partnership Agreement, TPG, as General Partner of the Partnership, may receive a disposition fee not to exceed three percent of the contract price on the sale of the properties of the Partnership and two affiliated publicly registered limited partnerships, DiVall Insured Income Fund Limited Partnership (“DiVall 1”), which was dissolved December 1998, and DiVall Income Properties 3 Limited Partnership, which was dissolved in December 2003 (“DiVall 3”), and together with the Partnership and DiVall 1, the “three original partnerships”). In addition, fifty percent of all such disposition fees earned by TPG were to be escrowed until the aggregate amount of recovery of the funds misappropriated from the three original partnerships by the former general partners was greater than $4,500,000. Upon reaching such recovery level, full disposition fees would thereafter be payable and fifty percent of the previously escrowed amounts would be paid to TPG. At such time as the recovery exceeded $6,000,000 in the aggregate, the remaining escrowed disposition fees were to be paid to TPG. If such levels of recovery were not achieved, TPG would contribute the amounts escrowed toward the recovery until the three original partnerships were made whole. In lieu of a disposition fee escrow, fifty percent of all such disposition fees previously discussed were paid directly to a restoration account and then distributed among the three original partnerships; whereby the three original partnerships recorded the recoveries as income. After the recovery level of $4,500,000 was exceeded, fifty percent of the total disposition fee amount paid to the three original partnerships recovery through the restoration account (in lieu of the disposition fee escrow) was refunded to TPG during March 1996. The remaining fifty percent amount allocated to the Partnership through the restoration account, and which was previously reflected as Partnership recovery income, may be owed to TPG if the $6,000,000 recovery level is met. As of December 31, 2018, the Partnership may owe TPG $16,296 if the $6,000,000 recovery level is achieved. TPG does not expect any future refund, as it is uncertain that such a $6,000,000 recovery level will be achieved.
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8. PMA INDEMNIFICATION TRUST:
The PMA provides that TPG will be indemnified from any claims or expenses arising out of, or relating to, TPG serving as the General Partner, so long as such claims do not arise from fraudulent or criminal misconduct by TPG. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership’s creditors. An Indemnification Trust (“Trust”) serving such purposes has been established at United Missouri Bank, N.A. The corpus of the Trust has been fully funded with Partnership assets. Funds are invested in U.S. Treasury securities. In addition, $214,710 of earnings has been credited to the Trust as of December 31, 2018. The rights of TPG to the Trust will be terminated upon the earliest to occur of the following events: (i) the written release by TPG of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against TPG and which is subject to indemnification; or (iii) a determination by a court of competent jurisdiction that TPG shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership.
9. FAIR VALUE DISCLOSURES
The Partnership has determined the fair value based on hierarchy that gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under the accounting principle are described below:
| Level 1. | Quoted prices in active markets for identical assets or liabilities. | |
| Level 2. | Quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, and inputs other than quoted prices that are observable for the investment. | |
| Level 3. | Unobservable inputs for which there is little, if any, market activity for the investment. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation and the use of discounted cash flow models to value the investment. |
The fair value hierarchy is based on the lowest level of input that is significant to the fair value measurements. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The Partnership assesses the levels of the Investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Partnership’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the years ended December 31, 2018 and 2017, there were no such transfers.
10. SUBSEQUENT EVENTS
The tenant for the Property operated as an Applebee’s restaurant has been in Chapter 11 bankruptcy since May 2018. In January 2019, the tenant for the Property operated as an Applebee’s filed with the court to continue with the Partnership’s lease without modification.
The lease for the Brakes4Less Property commenced on September 30, 2018. Per the terms of the First Amendment to lease dated January 15, 2019, the first 12 months’ rent was abated.
On February 15, 2019, the Partnership made a distribution to the limited partners of $500,000 in the aggregate, which amounted to $10.80 per Interest.
We have reviewed all material events through the date of this report in accordance with ASC 855-10.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Control and Procedures
Controls and Procedures
As of December 31, 2018, the Partnership’s management, including the persons performing the functions of principal executive officer and principal financial officer, have concluded that the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report were effective based on the evaluation of these controls and procedures as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act.
Management’s Report on Internal Control over Financial Reporting
The Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Partnership’s management assessed the effectiveness of the internal control over financial reporting as of December 31, 2018. In making this assessment, the Partnership’s management used the criteria set forth in the original Framework issued in 2013, by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. The Partnership’s management has concluded that, as of December 31, 2018, the internal control over financial reporting is effective based on these criteria. Further, there were no changes in the Partnership’s internal control over financial reporting during the three months ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
The Partnership’s management does not expect that the disclosure controls and procedures or the internal control over financial reporting will prevent all error and misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
This Annual Report on Form 10-K does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. As a non-accelerated filer, management’s report was not subject to attestation by the Partnership’s registered public accounting firm pursuant to rules in the Dodd Frank Act that permit the Partnership to provide only management’s report in this Annual Report on Form 10-K.
None.
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Item 10. Directors and Executive Officers of the Registrant
The Partnership itself does not have any employees, executive officers or directors and, therefore, has no board committees.
The General Partner of the Partnership is TPG. TPG’s principal office is located at 1100 Main Street, Suite 1830, Kansas City, Missouri 64105. TPG was elected General Partner by vote of the Limited Partners effective on May 26, 1993. Prior to such date, TPG had been managing the Partnership since February 8, 1993, under the terms of the PMA, which remains in effect. See Items 1 and 13 hereof for additional information about the PMA and the election of TPG as General Partner.
The executive officer and director of the General Partner who controls the affairs of the Partnership is:
Bruce A. Provo, Age 68 - President, Founder and Director, TPG.
Mr. Provo has been involved in the management of real estate and other asset portfolios since 1979. TPG was founded by Mr. Provo in 1985 and he has served as its President since its formation. TPG’s focus has been to provide professional real estate services to outside clients. Since the founding of TPG in 1985, Mr. Provo has also founded various entities engaged in unique businesses such as Rescue Services, Owner Representation, Asset Management, Managed Financial and Accounting Systems, Investments, and Virtual Resort Services. The entities are generally grouped under an informal umbrella known as The Provo Group of Companies. Since TPG was appointed General Partner to the Partnership in 1993, Mr. Provo has been primarily responsible for making management, leasing and disposition decisions on behalf of the Partnership.
From 1982 to 1986, Mr. Provo also served as President and Chief Operating Officer of the North Kansas City Development Company (“NKCDC”), North Kansas City, Missouri. NKCDC was founded in 1903 and the assets of the company were sold in December 1985 for $102,500,000. NKCDC owned commercial and industrial properties, including an office park and a retail district, as well as apartment complexes, motels, recreational facilities, fast food restaurants, and other properties. NKCDC’s holdings consisted of over 100 separate properties and constituted approximately 20% of the privately held real property in North Kansas City, Missouri (a four-square mile municipality). Following the sale of the company’s real estate, Mr. Provo served as the President, Chief Executive Officer and Liquidating Trustee of NKCDC from 1986 to 1991.
Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S. in Accounting. He became a Certified Public Accountant in 1974 and was a manager in the banking and financial services division of Arthur Andersen LLP prior to joining Rubloff Development Corporation in 1979. From 1979 through 1985, Mr. Provo served as Vice President - Finance and then as President of Rubloff Development Corporation.
The members of the Advisory Board of the Partnership are identified below. The Advisory Board provides guidance to management of the Partnership; however, it does not have the express power or authority to oversee and direct the operations of the Partnership and its members are not deemed “Directors” or “Executive Officers” of the Partnership.
William Arnold - Investment Broker. Mr. Arnold works as an independent financial planner, real estate broker and investment advisor. Mr. Arnold received a MSLA Master of Science Landscape Architecture from the University of Wisconsin and is a Certified Financial Planner. Mr. Arnold is a part of the brokerage community and the Partnership believes that as an Advisory Board member, he generally represents the views of the brokerage community.
Jesse Small – CPA. Mr. Small has been a tax and business consultant in Hallandale, FL for more than 30 years. Mr. Small has a Master’s Degree in Economics. Mr. Small is a Limited Partner, and the Partnership believes that as an Advisory Board member, he generally represents the views of Limited Partners. During the past five years after retiring from the accounting profession, Mr. Small has been developing property on the east and west coast of Florida.
Albert Kramer - Retired. Mr. Kramer is now retired, but previously worked as Tax Litigation Manager for Phillips Petroleum Company, now known as ConocoPhillips. His education includes undergraduate and MBA degrees from Harvard and a J.D. Degree from South Texas College of Law. Mr. Kramer is a Limited Partner, and the Partnership believes that as an Advisory Board member he generally represents the views of Limited Partners.
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Code of Ethics
The Partnership has no executive officers or any employees and, accordingly, has not adopted a formal code of ethics.
Mr. Provo and TPG require that all personnel, including all employees, officers and directors of TPG: engage in honest and ethical conduct; ensure full, fair, accurate, timely and understandable disclosure; comply with all applicable governmental laws, rules and regulations; and report to Mr. Provo any deviation from these principles. Because TPG has two employees (including Mr. Provo), and because Mr. Provo is the ultimate decision maker in all instances, TPG has not adopted a formal code of ethics. Mr. Provo, as Chief Executive Officer and Chairman of the Board of Directors of TPG, negotiates and resolves all conflicts to the best of his ability and determines appropriate actions if necessary to deter violations and promote accountability, consistent with his fiduciary obligations to TPG and the fiduciary obligations of TPG to the Partnership.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the officers and directors of TPG, and persons who own 10% or more of the Interests, to report their beneficial ownership of such Interests to the SEC. Their initial reports are required to be filed using the SEC’s Form 3, and they are required to report subsequent purchases, sales, and other changes using the SEC’s Form 4, which must be filed within two business days of most transactions. Officers, directors, and persons owning more than 10% of the Interests are required by SEC regulations to furnish the Partnership with copies of all of reports they file pursuant to Section 16(a).
As of December 31, 2018, Jesse Small was a beneficial owner of more than 10% of the outstanding Partnership Interests. In 2018 Mr. Small filed three separate Form 4s reporting a total of four separate purchase transactions that were effected in December 2017, March 2018 and September 2018. Each of these Form 4s was filed after its prescribed deadline.
Item 11. Executive Compensation
The Partnership has not paid any executive compensation to the General Partner or to the directors and officers of the General Partner. The person that performs the role of principal financial officer of the Partnership is a consultant to the General Partner and receives fees from the General Partner (but not directly from the Partnership) pursuant to that relationship. The General Partner’s participation in the income of the Partnership is set forth in the Partnership Agreement, as amended. The General Partner received management fees and expense reimbursements during the year.
See Item 13, below, and Note 5 to the Financial Statements in Item 8 hereof for further discussion of payments by the Partnership to the General Partner and the former general partners. The principal executive officer of the General Partner is not directly compensated by the Partnership for controlling the affairs of the Partnership.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The following table sets forth certain information with respect to such beneficial ownership of the Partnership as of March 31, 2019. Based on information known to the Partnership or filed with the SEC, the following persons are known to beneficially own 5% or more of the outstanding Interests as follows:
| Interests | Percentage of | |||||||||
| Title of | Name and Address of | Beneficially | Interests | |||||||
| Class | Beneficial Owner | Owned | Outstanding (1) | |||||||
| Limited Partnership Interest | Jesse Small | 6,669.34 | 14.41 | % | ||||||
| 401 NW 10th Terrace | ||||||||||
| Hallandale, FL33009 | ||||||||||
| Limited Partnership Interest | Ira Gaines | 3,921.925 | 8.47 | % | ||||||
| 1819 E. Morten Ave. Suite 180 | ||||||||||
| Phoenix, AZ 85020 | ||||||||||
(1) Based on 46,280.3 Interests outstanding as of March 31, 2019.
(b) As of March 31, 2019, the General Partner and the person who performs the functions of the principal executive officer of the General Partner did not beneficially own any Interests.
(c) Management knows of no contractual arrangements, the operation or the terms of which may at a subsequent date result in a change of control of the Partnership, except for provisions in the PMA.
Item 13. Certain Relationships and Related Transactions and Director Independence
Pursuant to the terms of the PMA, the General Partner receives a Base Fee for managing the Partnership equal to four percent of gross receipts, subject to a $159,000 minimum, annually. The PMA also provides that the Partnership is responsible for reimbursement for office rent and related office overhead (“Expenses”) up to a maximum of $13,250 annually. Both the Base Fee and Expense reimbursement are subject to annual Consumer Price Index based adjustments. Effective March 1, 2018, the minimum annual Base Fee and the maximum Expense reimbursement increased by 2.13% from the prior year, which represents the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2018, the minimum monthly Base Fee paid by the Partnership was raised to $23,036 and the maximum monthly Expense reimbursement was raised to $1,859.
Additionally, TPG, or its affiliates, are allowed up to one-half of the commissions customarily charged by other brokers in arm’s-length sales transactions involving comparable properties in the same geographic area, but such TPG commissions are not to exceed three percent of the contract price on the sale of an investment property. The payment of a portion of such fees is subordinated to TPG’s success at recovering the funds misappropriated by the former general partners. See Note 7 to the financial statements for further information.
The PMA had an original expiration date of December 31, 2002. The term of the PMA has been extended multiple times and is currently set to expire on December 31, 2020. The PMA can be terminated earlier (a) by a vote at any time by a majority in interest of the Limited Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon the entry of an order of a court finding that TPG has engaged in fraud or other like misconduct or has shown itself to be incompetent in carrying out its duties under the Partnership Agreement, or (d) upon sixty (60) days written notice from TPG to the Limited Partners of the Partnership. Upon termination of the PMA, other than by the voluntary action of TPG, TPG will be paid a termination fee of one month’s Base Fee allocable to the Partnership, subject to a minimum of $13,250. In the event that TPG is terminated by action of a substitute general partner, TPG shall also receive, as part of this termination fee, 4% of any proceeds recovered with respect to the obligations of the former general partners, whenever such proceeds are collected.
Under the PMA, TPG will be indemnified by the Partnership, DiVall and Magnuson, and their controlled affiliates, and held harmless from all claims of any party to the Partnership Agreement and from any third party including, without limitation, the Limited Partners of the Partnership, for any and all liabilities, damages, costs and expenses, including reasonable attorneys’ fees, arising from or related to claims relating to or arising from the PMA or its status as Permanent Manager. The indemnification does not extend to claims arising from fraud or criminal misconduct of TPG as established by court findings. To the extent possible, the Partnership is to provide TPG with appropriate errors and omissions, officer’s liability or similar insurance coverage, at no cost to TPG. In addition, TPG was granted the right to establish an Indemnification Trust in an original amount, not to exceed $250,000, solely for the purpose of funding such indemnification obligations. Once a determination has been made that no such claims can or will be made against TPG, the balance of the Trust will become unrestricted property of the Partnership. The corpus of the Trust has been fully funded with Partnership assets.
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Advisory Board Member Independence
Although not “directors” or “officers” of the Partnership, the Partnership does evaluate whether the members of the Advisory Board are “independent” by evaluating whether each member has any relationships or has engaged in any transactions that, in the opinion of the General Partner, would interfere with any Advisory Board member’s exercise of independent judgment with respect to matters concerning the Partnership. As a part of this evaluation the General Partner considers, among other things, transactions and relationships between any member of the Advisory Board or any member of his family and the Partnership. The General Partner believes that each of Messrs. Arnold, Small and Kramer are “independent”.
The Partnership paid and/or accrued the following to the General Partner and its affiliates in 2018 and 2017:
| Incurred for the | Incurred for the | |||||||
| Year
ended December 31, 2018 | Year
ended December 31, 2017 | |||||||
| General Partner | ||||||||
| Management fees | $ | 275,472 | $ | 270,110 | ||||
| Overhead allowance | 22,230 | 21,794 | ||||||
| Leasing commissions | - | 126,820 | ||||||
| Reimbursement for out-of-pocket expenses | 2,500 | 2,500 | ||||||
| Cash distribution | 1,451 | 2,751 | ||||||
| $ | 301,653 | $ | 423,975 | |||||
Item 14. Principal Accountant Firm Fees and Services
RBSM, LLP serves as the Partnership’s independent registered public accountants.
Audit Fees
Aggregate billings during the fiscal years ended December 31, 2018 and 2017, for audit and interim review services provided to the Partnership by its principal accounting firm, RBSM, LLP, amounted to $48,400 and $47,400, respectively.
Audit-Related Fees
For the fiscal years ended December 31, 2018 and 2017, RBSM, LLP did not perform any assurance and related services that were reasonably related to the performance of the audit or interim reviews.
Tax Fees
Tax compliance services billed during the fiscal years ended December 31, 2018 and 2017 were $27,000 and $26,650, respectively, provided by RSM US, LLP (“RSM”).
All Other Fees
For the fiscal years ended December 31, 2018 and 2017, neither RSM nor RBSM, LLP performed any management consulting or other services for the Partnership.
| 33 |
Item 15. Exhibits and Financial Statement Schedule
| (a) | 1. | Financial Statements |
| The following financial statements of DiVall Insured Income Properties 2 Limited Partnership are included in Part II, Item 8 of this Annual Report on Form 10-K: | ||
| Report of Independent Registered Public Accounting Firm | ||
| Balance Sheets at December 31, 2018 and 2017 | ||
| Statements of Income for the Years Ended December 31, 2018 and 2017 | ||
| Statements of Partners’ Capital for the Years Ended December 31, 2018 and 2017 | ||
| Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 | ||
| Notes to Financial Statements | ||
| 2. | Financial Statement Schedule | |
| Schedule III – Investment Properties and Accumulated Depreciation, December 31, 2018 |
| All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. |
| 3. | Listing of Exhibits |
| 3.1 | Agreement of Limited Partnership dated as of November 20, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnership’s Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference. | |
| 3.2 | Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), and incorporated herein by reference. | |
| 3.3 | Amendment to Amended Agreement of Limited Partnership dated as of February 8, 1993, filed as Exhibit 3.3 to the Partnership’s 10-K for the year ended December 31, 1992, Commission File 0-17686, and incorporated herein by reference. | |
| 3.4 | Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnership’s 10-K for the year ended December 31, 1993, Commission File 0-17686, and incorporated herein by reference. | |
| 3.5 | Amendment to Amended Agreement of Limited Partnership dated as of June 30, 1994, filed as Exhibit 3.5 to the Partnership’s 10-K for the year ended December 31, 1994, Commission File 0-17686, and incorporated herein by reference. | |
| 3.6 | Amendment to Amended Agreement of Limited Partnership dated as of November 9, 2009, filed as Exhibit 4.1 to the Partnership Quarterly Report on Form 10-Q filed November 12, 2009, Commission File 0-17686, and incorporated herein by reference. | |
| 3.7 | Certificate of Limited Partnership dated November 20, 1987. Commission File 0-17686, filed March 22, 2013, and incorporated herein by reference. |
| 34 |
None.
| 35 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III – INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2018
| Gross Amount at which | Life on which | ||||||||||||||||||||||||||||||||||||||||
| Initial Cost to Partnership | Carried at End of Year | Depreciation | |||||||||||||||||||||||||||||||||||||||
| Property | Encumbrances | Land | Building and Improvements | Costs Capitalized Subsequent to Acquisitions | Land | Building and Improvements | Total | Accumulated Depreciation | Date of Construction | Date Acquired | in latest statement of operations is computed (years) | ||||||||||||||||||||||||||||||
| Augusta, GA (1) | - | 215,416 | 434,176 | - | 213,226 | 434,176 | 647,402 | 414,754 | - | 12/22/1988 | 31.5 | ||||||||||||||||||||||||||||||
| Charleston, SC | - | 273,619 | 323,162 | - | 273,619 | 323,162 | 596,781 | 308,705 | - | 12/22/1988 | 31.5 | ||||||||||||||||||||||||||||||
| Aiken, SC | - | 402,549 | 373,795 | - | 402,549 | 373,795 | 776,344 | 356,109 | - | 2/21/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Augusta, GA | - | 332,154 | 396,659 | - | 332,154 | 396,659 | 728,813 | 377,891 | - | 2/21/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Mt. Pleasant, SC (2) | - | 286,060 | 294,878 | - | 252,069 | 294,878 | 546,947 | 280,926 | - | 2/21/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Charleston, SC | - | 273,625 | 254,500 | - | 273,625 | 254,500 | 528,125 | 242,458 | - | 2/21/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Aiken, SC | - | 178,521 | 455,229 | - | 178,521 | 455,229 | 633,750 | 433,690 | - | 3/14/1989 | 31.5 | ||||||||||||||||||||||||||||||
| North Augusta, SC | - | 250,859 | 409,297 | - | 250,859 | 409,297 | 660,156 | 378,079 | - | 12/29/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Martinez, GA | - | 266,175 | 367,575 | - | 266,175 | 367,575 | 633,750 | 339,540 | - | 12/29/1989 | 31.5 | ||||||||||||||||||||||||||||||
| Columbus, OH | - | 351,325 | 708,141 | - | 351,325 | 708,141 | 1,059,466 | 644,566 | - | 6/1/1990 | 31.5 | ||||||||||||||||||||||||||||||
| $ | - | $ | 2,830,303 | $ | 4,017,412 | $ | - | $ | 2,794,122 | $ | 4,017,412 | $ | 6,811,534 | $ | 3,776,718 | ||||||||||||||||||||||||||
| (1) | In the Fourth Quarter of 2001, a portion of the land was purchased from the Partnership by the County Commission for utility and maintenance easement. | |
| (2) | In the Third Quarter of 2013, a portion of the land was sold to the City of Charleston for right of way purposes. |
| 36 |
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III – INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2018
(B) Reconciliation of “Investment Properties and Accumulated Depreciation”:
| Investment Properties | Year Ended December 31, 2018 | Year Ended December 31, 2017 | Accumulated Depreciation | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||
| Balance at beginning of year | $ | 6,629,014 | $ | 6,629,014 | Balance at beginning of year | $ | 3,745,299 | $ | 3,621,157 | |||||||||
| Additions: | Additions charged to costs and expenses | 166,050 | 124,142 | |||||||||||||||
| Vacant- Martinez, GA property held for sale (1) | 633,750 | Vacant- Martinez, GA property held for sale (1) | 316,599 | |||||||||||||||
| Deletions: | ||||||||||||||||||
| Palo Alto, NM expiration of ground lease (2) | (451,230 | ) | Palo Alto, NM expiration of ground lease (2) | (451,230 | ) | |||||||||||||
| Balance at end of year | $ | 6,811,534 | $ | 6,629,014 | Balance at end of year | $ | 3,776,718 | $ | 3,745,299 | |||||||||
(1) In the Second Quarter of 2018, the property was no longer classified as held for sale
(2) In the Second Quarter of 2018, the property was fully depreciated and removed from the balance sheet due to the expiration of the ground lease.
| 37 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DIVALL INSURED INCOME PROPERTIES 2, L.P. |
| By: | /s/ Bruce A. Provo | |
President, Chief Executive Officer and Director of The Provo Group, Inc., the General Partner of the Partnership (principal executive officer of the registrant) |
| By: | /s/ Lynette L. DeRose | |
| Chief Financial Officer of the Partnership |
| (principal financial officer and principal accounting officer of the registrant) |
| By: | THE PROVO GROUP, INC., General Partner |
| By: | /s/ Bruce A. Provo | |
| President, Chief Executive Officer and | ||
| Director of The Provo Group, Inc., the | ||
| General Partner of the Partnership (principal executive officer of the registrant) |
Dated: April 1, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /s/ Bruce A. Provo | |
President, Chief Executive Officer and Director of The Provo Group, Inc., the General Partner of the Partnership |
| By: | /s/ Caroline E. Provo | |
| Director of The Provo Group, Inc., the General | ||
| Partner of the Partnership |
Date: April 1, 2019
| 38 |
Exhibit 31.1
DIVALL INSURED INCOME PROPERTIES 2
LIMITED PARTNERSHIP
CERTIFICATIONS
I, Lynette L. DeRose, certify that:
| 1. | I have reviewed this annual report on Form 10-K of DiVall Insured Income Properties 2 Limited Partnership; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: April 1, 2019 | By: | /s/ Lynette L. DeRose |
| Chief Financial Officer of the Partnership | ||
| (principal financial officer of the registrant) |
Exhibit 31.2
DIVALL INSURED INCOME PROPERTIES 2
LIMITED PARTNERSHIP
CERTIFICATIONS
I, Bruce A. Provo, certify that:
| 1. | I have reviewed this annual report on Form 10-K of DiVall Insured Income Properties 2 Limited Partnership; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: April 1, 2019 | By: | /s/ Bruce A. Provo |
| President, and Chief Executive Officer of The Provo Group, Inc., the General Partner of the Partnership | ||
| (principal executive officer of the registrant) |
Exhibit 32.1
DIVALL INSURED INCOME PROPERTIES 2
LIMITED PARTNERSHIP
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned principal executive officer and principal financial officer of Divall Insured Income Properties 2 Limited Partnership (the “Company”) certify that the Annual Report on Form 10-K of the Company for the period ended December 31, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: April 1, 2019 | By: | /s/ Lynette L. DeRose |
| Chief Financial Officer of the Partnership | ||
| (principal financial officer of the registrant) |
| By: | /s/ Bruce A. Provo | |
| President, and Chief Executive Officer of The Provo Group, Inc., the General Partner of the Partnership | ||
| (principal executive officer of the registrant) |
This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.
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